The Board's Blind Spot: Creditor Duties When a UK Company Starts to Struggle

Directors usually meet section 172 of the Companies Act 2006 in the context of shareholder value. The section is often summarised as a duty to promote the success of the company for the benefit of its members. That summary is incomplete. Where a company is insolvent, bordering on insolvency, or where insolvent liquidation or administration is probable, the same duty requires directors to consider the interests of creditors. The weight given to those interests increases as financial distress deepens.

That principle is not new, but it is easily overlooked in the day-to-day pressure of a struggling business. The practical risk is that board decisions taken to keep the company alive can later be examined by a liquidator, an administrator or a creditor with the benefit of hindsight. The question will not simply be whether the decision was commercially unfortunate. It will be whether the directors recognised the company's position, considered the right interests and acted on reasonable information.

What the creditor duty actually requires

Section 172(3) of the Companies Act 2006 preserves the rule that directors must consider creditors' interests when the company is insolvent or nearing insolvency. The Supreme Court considered the duty in BTI LLC LLC v Sequana SA [2022] UKSC 25. The case confirmed that the duty is not a separate, free-standing obligation that switches on at a single moment. It is an aspect of the directors' general duty, with the creditors' interests gaining greater weight as the company's financial position deteriorates.

In practical terms, directors should not wait for a formal insolvency event. A company can be solvent on a balance sheet basis yet unable to pay its debts as they fall due. A board that continues to trade in that condition without a credible plan, reliable cash-flow information and recorded reasoning is exposed to criticism. At the far end of the spectrum, where insolvent liquidation is probable, creditors' interests may become paramount.

Warning signs that should reach the board

Distress rarely arrives without signals. Directors should treat the following as matters for the board, not merely for the finance team:

• repeated missed payment dates or requests for extended credit from suppliers;
• HMRC arrears, a time-to-pay arrangement under strain, or unpaid VAT and PAYE;
• a lender reducing or withdrawing an overdraft or invoice finance facility;
• key suppliers demanding cash on delivery or stopping supply altogether;
• negative net assets, a qualified audit report or a going-concern warning;
• wages or rent being funded from tax reserves or one-off asset sales;
• a cash-flow forecast that only balances if uncertain receipts arrive on time;
• director loans, unlawful dividends or payments to connected parties that cannot be justified.

None of these signs automatically means the company is insolvent. Together, however, they should prompt a structured review. The board should be able to explain what it knows, what it has asked for and what it has done about the information it has received.

The wrongful trading line

Wrongful trading sits in section 214 of the Insolvency Act 1986. In broad terms, once a director knows or ought to conclude that there is no reasonable prospect of avoiding insolvent liquidation, the director must take every step to minimise the potential loss to creditors. A liquidator can seek a contribution from a director who fails to do so. Fraudulent trading, misfeasance and preference claims can arise in parallel.

The test is not whether the director intended harm. It is whether the director acted with the required level of care once the company's position was or should have been apparent. That is why board minutes, management accounts and professional advice matter. They are not paperwork for its own sake. They are evidence that the directors engaged with the company's financial reality.

How to document board decisions

A template minute recording that the board considered creditors' interests is unlikely to help if the underlying information is thin. Better practice is to record:

• the current cash-flow forecast, its assumptions and the date it was prepared;
• the company's ability to pay debts as they fall due over the forecast period;
• the options considered, including informal negotiation, a company voluntary arrangement, administration, a sale of the business or liquidation;
• the advice received from insolvency practitioners, accountants or lawyers, and the date it was received;
• the reasons for continuing to trade, if that is the decision, and the milestones at which the position will be reviewed;
• any dissenting views expressed by directors;
• the next review date and the information required for it.

Minutes should be prepared promptly and should not be rewritten later to look more favourable. A candid record of a difficult decision is generally more credible than a polished document created after a liquidator has asked questions.

Practical steps for the board

Directors should move to a shorter reporting cycle when distress appears. A thirteen-week cash-flow forecast reviewed weekly is a common starting point. Management accounts should be current, and the board should understand which creditors are being paid, which are being deferred and why. Payments to connected parties, director remuneration and dividends deserve particular scrutiny.

It is also sensible to keep key creditors informed in a measured way. That does not mean disclosing every internal uncertainty, but it does mean avoiding misleading statements about the company's ability to pay. If the company is taking new credit or deposits at a point when there is no reasonable prospect of fulfilling orders, the risk increases sharply.

When to take advice

Legal and insolvency advice should be taken early, not when a statutory demand arrives. Early advice preserves options: negotiation with lenders and HMRC, a solvent sale, a pre-pack administration or a managed wind-down may all be more realistic before positions harden. Advice from a solicitor may also attract legal professional privilege in certain circumstances, although that should not be assumed for all communications.

A director who recognises the shift in duties, records the board's reasoning and obtains informed advice is in a far stronger position than one who treats creditor interests as a concern for the day the company fails. The duty is easy to miss in the noise of a cash-flow crisis. It is much harder to defend a decision that was never properly considered.

This article is general information for UK businesses and is not legal advice. Directors facing financial distress should take advice on their specific circumstances.